This increase in risk appetite reflects a prevailing sense of euphoria among retail investors, although market participants warn that this growing leverage could pose challenges during events like Wednesday’s crash in stock prices.
The margin trading funding (MTF) book for the stockbroking industry has increased to ₹54,537 crore as on January 16, compared with ₹29,500 crore in January last year and about ₹7,100 crore in February 2020, according to data compiled by ratings firm ICRA.
The primary reason for the increase in margin funding is the outperformance of the market, particularly in mid- and small-cap stocks, which led to more retail investors purchasing stocks by paying a margin, according to market participants.
Agencies“MTF is a product associated with bull markets, and retail investors anticipating a substantial market rally have assumed leveraged positions,” said Dhiraj Relli, managing director, HDFC Securities. “The notable rise in MTF carries a risk that would materialise primarily in the event of a market crash, leading to margin selling triggers.”The Nifty Midcap 100 and Smallcap 100 indices have gained 29% and 36%, respectively, in the last six months, compared with a 10% gain in the Nifty50.
Many brokers provide MTF facilities for nearly 1,000 stocks. MTF is a financial product that enables investors to leverage brokers’ funds for trading in the cash market. Depending on the client’s risk profile, brokers levy an interest rate ranging from 7% to 18%.ICICI Securities, which maintains a leadership position in the MTF business with a market share of about 22%, charges about ₹26 per day on ₹1 lakh on the funded amount. ICICI Securities’ MTF book increased from ₹6,440 crore in March 2023 to ₹9,980 as of December 2023. MStock by Mirae Asset provides an MTF option for traders at an interest rate between 6.99% and 9.99%.
“With a sizeable increase in leveraged positions, the industry’s ability to manage the heightened risk during periods of market turmoil remains to be seen,” said Karthik Srinivasan, senior vice-president of ICRA.
“Nonetheless, MTF loan exposures are fairly diversified across over 600 scrips with funded amounts of at least 10 crore with the largest single scrip exposure at less than 2% of the overall MTF exposure at an industry level, which is a comforting factor.”
With the sharp expansion in the MTF book, the outstanding commercial paper (CP) borrowings for ICRA’s sample of leading securities broking companies increased to an all-time high of 45,000 crore, accounting for 11% of the overall CP outstanding in November 2023 compared with 2% two years earlier. Brokerages borrow through CPs to fund their MTF book.
